Bulletin

NYSE approves plan to loosen circuit-breakers

CBS.MarketWatch.com

NEW YORK (AP) -- New circuit breakers adopted by the New York Stock Exchange could provide some comfort to critics who oppose intervention in the market to halt trading when prices go into a tailspin.

The NYSE on Thursday voted to raise the threshold for trading curbs to market drops of 10 percent, 20 percent and 30 percent. The market has fallen 20 percent in one day just once and 10 percent twice -- but not recently.

The changes are being made because of concerns the current triggers are too low and can aggravate market instability. They now stand at market drops of 350 points, which is currently equal to about 4 percent, and 550 points, or about 7 percent.

Even at those levels, the triggers have only been activated once: last Oct. 27. But that sparked howls of protest and a push to raise the limits intensified. The discussion even reached Congress.

The circuit breakers, installed after the October 1987 stock market crash, are designed to give investors time to calm down during severe price declines and prevent another market meltdown.

But critics said that during the October selloff -- especially with the limits so low -- the curbs worsened the panic because investors were rushing to sell their stocks before the markets shut down and locked them out.

If the new limits were in place then, trading wouldn't have been interrupted because it would have taken drops of about 800 points 1,600 points and 2,400 points for them to kick in. October's drop was 554 points.

The latest changes proposed by the NYSE didn't come easily. The exchange had to modify an earlier plan to appease federal regulators, who felt it wasn't loose enough.

The NYSE had to back away from a provision to shut down for the day anytime there was a 20 percent drop to avoid a showdown with the Securities and Exchange Commission, whose approval it needed.

SEC Chairman Arthur Levitt Jr. had opposed closing the markets prematurely, and indicated such a move should happen only in rare and extreme circumstances because of the potential to cause a bigger panic.

In testimony to the Senate Banking subcommittee on securities last week, Levitt said he favored a market shutdown for the day at the 20 percent threshold only if it occurred late in the session.

In an attempt to make the plan more pleasing to regulators, the NYSE decided that trading would halt for the day only if the Dow Jones industrial average
DJIA, +0.14%
drops 20 percent after 2 p.m. and by 30 percent at any time.

"We think we came up with something that the exchanges can work with and that regulators can endorse," said Edward A. Kwalwasser, an NYSE executive vice president. "We think we came up with something that is right."

The NYSE also dropped plans to close the market for the day if the Dow dropped 10 percent after 2:30 p.m. -- an idea that was included in its preliminary proposal that was floated late last month.

The plan will be submitted to the SEC for its approval and is expected to be implemented within 45 to 60 days if there aren't any major problems, Kwalwasser said.

"We are very encouraged by the proposal, as it appears to meet many of the concerns expressed by (Levitt)," said SEC spokesman Chris Ullman. The SEC would seek public comment on the plan before voting on it.

The proposal is the most radical reform to the circuit breakers since they were implemented, and Kwalwasser said "there is no reason to believe that the 30 percent (threshold) can ever happen."

Other provisions of the plan call for two-hour halt to trading if there is a 20 percent decline before 1 p.m.; a similar decline between 1 p.m. and 2 p.m. will shut the market for one hour.

The new plan also calls for trading to be suspended for one hour if the Dow drops 10 percent before 2 p.m. and for a half-hour if the decline is between 2 p.m. and 2:30 p.m.

Under the current circuit breakers, markets would shut down for the day only if the 550-point limit was reached after 3 p.m. Trading is halted for half-hour on a 350-point drop prior to 3 p.m.; and for one hour for a 550 point decline before 2 p.m.

Trading halts were enacted after the Oct. 19, 1987 Black Monday crash, when the Dow Jones industrial average fell 508 points, or 22 percent -- the only time it has declined more than 20 percent. The two 10 percent declines came during the 1929 crash.

When the restrictions were first implemented, the Dow had to fall 12 percent to trigger the first halt and 19 percent to trigger the next. Criticism of the thresholds as outdated has grown with the nearly quadrupling of the Dow Jones industrial average since then.

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